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Understanding the Differences: Universal Life vs. Indexed Universal Life Insurance

Updated: May 3


Choosing the right life insurance can be a significant decision in one’s financial planning process. Among the various options available, Universal Life (UL) and Indexed Universal Life (IUL) insurance policies are popular choices. Though they share some similarities, their differences are crucial in determining which policy might be the best fit for your financial goals and needs. In this blog, we'll explore how UL differs from IUL, helping you make an informed decision.

Universal Life vs. Indexed Universal Life Insurance

What is Universal Life Insurance?

Universal Life insurance is a type of permanent life insurance that offers an adjustable death benefit and flexible premium payments. One of the main features of UL is its savings component, known as the cash value. The cash value of a UL policy grows at a rate determined by the insurer, which is usually pegged to a financial index but with a guaranteed minimum interest rate. This means that the growth of the cash value is relatively stable but modest.

What is Indexed Universal Life Insurance?

Indexed Universal Life insurance is a variant of UL that provides more potential for cash value growth. Instead of growing based on a fixed interest rate, the cash value in an IUL policy is tied to the performance of a stock market index, such as the S&P 500. This allows the policyholder to potentially benefit from market gains without risking loss of principal due to market declines, as the policy typically includes a floor that protects against losses.

Key Differences Between UL and IUL

  1. Interest Earning Method: The fundamental difference lies in how the cash value accumulates interest. In UL, the rate is declared by the insurance company and often has a guaranteed minimum. In contrast, IUL links the interest rate to a stock index's performance, with both a cap on maximum gains and a floor on losses.

  2. Potential for Growth: IUL offers a higher potential for growth compared to UL due to its link to stock market performance. However, this also introduces more variability in the potential return.

  3. Risk and Guarantees: UL offers more predictability with its guaranteed minimum interest rate, making it a safer but potentially less rewarding option compared to IUL, which although has a floor to mitigate risk, fluctuates more due to its reliance on market performance.

  4. Flexibility: Both policies offer flexibility in premiums and death benefits, but IUL's potential for higher returns might be more attractive to individuals looking for both life insurance and a more aggressive investment strategy.

  5. Cost: IUL policies can be more expensive than UL policies due to additional fees associated with the management of these funds, like the costs involved in protecting the policy against market downturns.


Both Universal Life and Indexed Universal Life insurance policies offer valuable life coverage and a component of cash value growth, which can be a part of your broader financial strategy.

Your choice between UL and IUL should depend on your financial objectives, risk tolerance, and investment outlook. For those who prefer more stable and predictable growth, UL may be the way to go. However, for individuals who are more investment-savvy and can handle potential fluctuations in return, IUL offers an attractive alternative.

Before making a decision between Universal Life vs. Indexed Universal Life Insurance, it’s always wise to consult with a financial advisor. Power 3 Financial is well-equipped to help you navigate through these options, particularly with policies that offer living benefits, adding an extra layer of financial security.

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